This is the first in a series of reports comparing reform plans.
Social Security reform is a long-term problem. It will eventually break due to laws already on the books which require increasing benefits for everyone. The inescapable problem of demographics also looms – more people retiring, fewer younger people working to pay for their benefits. Social Security now has almost enough income to pay for the benefits. It is only slightly in the red in this fiscal year. Reform won’t be a big influence on the federal deficit or the federal debt at this point in time. Still, reform is crucial. Both Rep. Paul Ryan’s plan and the President’s Commission on Fiscal Responsibility recognize the problem and address it in a significant way.
Rep. Paul Ryan’s plan can be found at Roadmap for America (The font is very small – you might want to use zoom to make it larger – I used 140%)
The Report (pdf version) of the President’s Commission on Fiscal Responsibility, chaired by Alan Simpson can be found at The Moment of Truth
I’ll endeavor to summarize the differences for you, but the actual language can be found at these websites.
Neither proposal has gotten very far. President Obama accepted Simpson’s commission report in December 2010, and hasn’t mentioned it since, nor has he included any portion of it in his own so-called Fiscal Reform Plan. A few days after Ryan’s plan was released, Obama lambasted it in a speech with Ryan sitting directly in front of him. Truly, I don’t know why Ryan didn’t get up and leave the room.
Note that Ryan would have seen Simpson’s plan before creating his own. Neither plan affects current retirees over 55.
- The Ryan plan asserts that the return on the worker’s investment is too small, and therefore allows a portion of the Social Security payroll tax to be optionally placed into a personal retirement account. The government will guarantee a large percentage of the money invested.
- The Ryan plan will provide a new enhanced minimum benefit for low income payees, but will provide lesser increases for higher income payees. All individuals in the traditional system who meet certain working requirements will be ensured that their minimum benefits are equal to at least 120% of the Federal poverty level, an improvement from current law. Those in the personal account system will be guaranteed a minimum of at least 150% of the Federal poverty level.
- Ryan will advance the retirement age from 65 to 67 for future retirees by 2026.
- Ryan will also reduce benefits growth over time by using something called price indexing, combined with wage indexing. Too complex to explain here, this will reduce the growth of the benefits schedule considerably. It is the crucial reform to keep SS solvent. Here, I’m talking about the formula for calculating how much someone makes – set before they draw their first check. I’m not talking about raising income for individuals already on the program. People who retire ten years from now will generally draw more than those retired now. Individuals may have cost-of-living raises over time.
Simpson and his bi-partisan commission took a similar approach to Social Security reform, but the details differ.
- Simpson will also reduce benefits growth over time by using something called wage indexing. Again, this is the crucial reform to keep SS solvent.
- Simpson will also advance the normal retirement age from 65 to 67 for future retirees by 2026, but plans to keep moving it up — effectively increasing to 68 by about 2050 and 69 by about 2075, and the early retirement age to 63 and 64 in lock step.
- To better insure against the risk of outliving one’s own retirement resources, the Commission proposes a new “20-year benefit bump-up” that offers a benefit enhancement, equal to 5 percent of the average benefit, 20 years after eligibility. The enhancement is phased in over five years (1 percent per year). This goody, of course, would somewhat increase SS costs. For example, you retire at 67, and beginning at 87, your check goes up 1% per year, the last bump at age 91. The death rate of people in that age group keeps the costs down.
- Simpson proposes a new enhanced minimum benefit for low-wage workers, not less than 125% of the Federal poverty level.
- Simpson will allow beneficiaries to collect half of their benefits as early as age 62, and the other half at a later age (with actuarial reduction of benefits). Also, direct the Social Security Administration to design a hardship exemption for those who cannot work past 62 but who do not qualify for disability benefits.
- The Commission proposes to gradually increase the taxable maximum so that it covers 90 percent of wages by 2050. This recommendation would result in a taxable maximum of about $190,000 in 2020, versus approximately $168,000 in current law.
- The Commission recommended, but did not include personal retirement accounts. An excerpt from their report: “A serious bipartisan conversation needs to take place regarding incentives to generate personal retirement savings that supplement Social Security and addresses the gap between what Americans need for retirement and what they currently have.”
My opinion follows:
I favor the Ryan plan, but I like some features of the Simpson Report. I think both miss a vital point – SS benefits, in my opinion, should be “means tested”.
Specifically, in my opinion, the government should not be supporting wealthier Americans. Social Security, for example, averages about $1280 per month. I’d begin phasing it out for those with family incomes of $50,000 or more (not counting Social Security benefits), and cut it out completely at $75,000. In other words, prorate benefits over that range. People making that much money don’t need it as much as those with other income at or near the poverty level. Savings? About 27.4% of all premiums received and benefits paid would be removed from the system, and the percentage wouldn’t change much with population growth. My figures are based on charts at Social Security statistics.
Savings would be approximately $192 billion dollars based on the 2010 budget figure of $701 billion dollars. Social Security would be on a sound basis again, and would likely remain that way for a long time.
I would allow people to requalify if their income fell below the upper limit, and begin drawing SS benefits.